The new Home Mortgage Disclosure Act reporting requirements have been in place since the beginning of the year, but lenders are still adjusting to how they work in practice.
"There's a decommissioning psychologically of the old process which creates many, many hiccups during the first 90 to 100 days after the effective date of the rule," said Pam Perdue, chief regulatory officer and executive vice president of compliance systems provider Continuity.
Automation is handling a lot of the compliance burden, but lenders also need to make sure their policies, practices and training are aligned with the practical realities of implementation.
"Most of the heavy lifting with the technology development is done, but there is still a tremendous amount of work that the lenders themselves have to account for," said Paul Christison, compliance product manager at vendor WGS.
From mixed messages about enforcement to complexities involved in determining which types of loans are now reportable, mortgage lenders think hard about how they are handling with the new rules because ultimately they, not their vendors, are the ones responsible for complying with them.
"I hear people say, 'We're waiting on the vendor' or 'the vendor couldn't do this because the vendor didn't let us test it out.' Throw that out. That's not productive thinking at all. We're accountable," said Ben Giumara, director of legal and regulatory affairs at Embrace Home Loans.
Here's a look at five potential missteps mortgage lenders transitioning to new Home Mortgage Disclosure Act rules need to steer clear of.
Mistakenly thinking the CFPB's retreat means enforcement will ebb
But given that large institutions lack exemptions and the CFPB is calling for other prudential regulators, including the states, to step in on supervision, it is clear that HMDA data compliance will still be watched closely in other quarters, and lenders should remain vigilant.
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Misreporting commercial mortgages
Deciding whether and how to report commercial mortgages has been the biggest source of confusion related to the new HMDA rules for clients of compliance technology provider Continuity. Almost two-thirds of the more than 200 questions Continuity received in January and February were related to this topic.
The rules that determine, for example, whether a mixed-use loan is reportable, are complex and they only be partially automated because they force lenders to make judgment calls and possibly specify their own criteria.
For example: A mixed-use loan that is not used for home improvement becomes HMDA reportable if it's primarily residential, and lenders have to pick one of three methods to use to determine if it is: the square footage, income or another "reasonable method."
If the mixed-use loan is used for home improvement, the loan is reportable if the proceeds are primarily to improve the residential portion or the improvement will benefit the entire property the way something like a heating system upgrade would.
Lenders can use a decision-tree technology as a job aid to help users determine whether a commercial loan is reportable, and should ideally customized their operations in a way that ensures the criteria used in reporting decisions are consistent.
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Overreporting to compensate for confusion about new criteria
Trying to err on the side of caution by overreporting loans is a bad idea because reporting on a mortgage that didn't need to be reported carries the same penalties as neglecting to report a loan that should have been reported.
The public aspect of a lot of HMDA data also makes overreporting dangerous.
"It does become public data, and the bigger the institution, the more likely that exposing this public data exposes them to reputation risk and public criticism," said Perdue. "Not only do you have more potential to report things you shouldn't, but by reporting things that may or may not have actually been needed, even if the regulator doesn't ding you for it, you've gone on record publicly saying these are the lending patterns you've engaged in."
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Jumping the gun by using URLA to report HMDA data
The new Uniform Residential Loan Application includes demographic borrower information aimed at matching the data lenders are required to report under the new HMDA reporting rules.
But although the HMDA rules are in effect and updated versions of the URLA are available, Fannie Mae and Freddie Mac aren't allowing lenders to use the URLA on live production until February 2019.
Most vendors are giving their lender clients forms to report the demographic information separately until the URLA can be used to collect the data.
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Neglecting quarterly updates for too long
HMDA, even prior to the rule change this year, required lenders to update data internally on a quarterly basis in case a rare special request was made for it.
The new HMDA rule takes this a step further by requiring large institutions to start filing their HMDA data quarterly on an ongoing basis by May 30, 2020.
While this isn't an immediate concern, any large lender that has neglected their quarterly reporting because there has been little need for it previously, should pencil in a plan to take care of it ideally at least three to six months before the implementation date.
These lenders "will have to install quality assurance reviews and data scrubs plus the added filing duties, so those reporters will need to prepare much sooner and more vigorously to get the processes fine-tuned before the effective date of the new filing frequency," said Perdue.